Bando Chemical Industries is Japan’s largest manufacturer of power transmission* and conveyor belts. The Japanese market for power transmission belts is worth about JPY50.0bn and the global market about JPY400.0bn (Shared Research estimates based on Ministry of Economy, Trade and Industry [METI] data; market price basis). While the domestic production shipment value for such products has declined from JPY55.1bn in 2011 to JPY42.9bn in 2020 (compound annual decline rate of 2.5%), the overseas market is worth 6–7x the domestic market by our estimates, and therefore offers considerable room for growth. Bando has a leading domestic market share of about 50% in accessory drive belts** for automobiles, and a global market share of roughly 20%, making it the world’s third largest supplier of such products (Shared Research estimate). In non-automobile products, the company leads the global market for variable speed belts with a share of over 50%. These are used extensively by Honda Motor (TSE1: 7267) in its motorcycles, especially small scooters.
*Power transmission belts: Belts that transmit power from engines or motors by running over pulleys (disc-shaped objects). They are widely used in automobiles, agricultural machinery, general industrial machinery, and office automation (OA) equipment. According to Bando, the high-end segment of the power transmission belt market is controlled by a group of eight companies in which it is included. This market is poised for realignment driven by the growing trend toward the electrification of vehicles, and especially the rise of electric vehicles (EVs) that do away with traditional engines. **Accessories: A general term for peripheral devices that are necessary to drive the main engine of a vehicle. ***Automotive power transmission belts: These come in two major types: accessory drive belts (fan belts) and synchronous belts. Accessory drive belts drive accessories such as alternators, power-steering pumps, and water pumps. Accessory drive belts used in passenger vehicles are generally V-ribbed belts, while those employed in trucks are predominantly V-belts. Synchronous belts, which rotate camshafts (rods responsible for opening and closing engine valves at the appropriate times), have seen a decline in usage in recent years. When a belt is damaged, the transmission of power to various parts is lost, resulting in a vehicle that can no longer drive.
In FY03/21, revenue was JPY81.4bn and core operating profit JPY4.9bn. By segment, the mainstay Automotive Parts segment made up 43.0% of total revenue (48.3% of total core operating profit), the Industrial Products segment 37.1% (45.3%), the Advanced Elastomer Products segment 14.6% (core operating loss of JPY129mn), and the Other Business segment 5.4% (6.9%). Shared Research estimates belt-related revenue totaled roughly JPY65.0–68.0bn, 20–25% above the JPY54.4bn reported by Mitsuboshi Belting (TSE1: 5192), the second-largest belt supplier in Japan.
In FY03/21, overseas revenue was JPY39.2bn (48.2% of total revenue; CAGR of 1.2% from JPY34.7bn in FY03/11). Asia accounted for 37.3%, and Europe, the US, and all other regions for 11.0%. Bando has been active overseas for many years. It set up representative offices in the US and Germany in 1969, converted both into local subsidiaries in 1978, and subsequently moved into Asia. Drawing on the insights gained from these early overseas forays, it has expanded its overseas presence with a focus on Asia. Today, Bando operates a global supply structure with four strategic regions: Asia (17 bases), North America (two bases), Europe (three bases), and Japan. The company continually looks for opportunities to grow its overseas operations in existing and new regions, and monitors the efficiency of its existing bases. It plans to further increase its footprint abroad while adjusting its number of overseas bases. Shared Research understands that Bando generates nearly half of its core operating profit from its overseas business, mainly from its operations in Asia, where the company can capture demand for automotive, motorcycle, and agricultural machinery products. Incidentally, the first overseas plant of a Japanese automaker came online in the UK in 1982.
Accessory drive belts for automotive engines (chiefly V-belts and V-ribbed belts) are functional products made of rubber or urethane. They are consumables that deteriorate in proportion to the distance traveled. For this reason, accessory drive belts supplied for new vehicles inevitably generate replacement demand after a few years, contributing to sales of repair parts. Repair parts can be broken down into genuine parts supplied directly to automakers, and own-brand products supplied to car product retailers and repair shops via specialist trading companies. Bando commands a high share of the domestic market for repair parts, and domestic car ownership—an indicator of latent demand for repair parts—has consistently trended up over the last 10 years, reaching a record-high 78.3mn vehicles at end-March 2021. In addition, the average period car owners hold on to their vehicles has lengthened (from 9.26 years in 1990 to 13.87 years in 2021, in the case of passenger vehicles), and this has fueled high levels of replacement demand.
Accessory drive belts must meet certain benchmarks in terms of durability, thermal resistance, quiet operation, lightweight design, and low costs. Achieving these requires compounding, dispersion, and combining technologies for raw materials, and Bando possesses proprietary materials processing technologies. Raw materials costs are the largest component of its manufacturing costs (roughly 50%), and changes in the naphtha price affect its earnings with a lag of three to four months. While Bando generally attempts to pass on increases in raw material prices to its customers (mainly automakers), it is not always able to avert short-term impact. However, because its materials processing technologies often give it an edge in price negotiations, the company is sometimes able to increase prices midway through a fiscal year. Conversely, drops in raw material prices drive up earnings, but also gradually increase downward pressure on prices from customers.
In the Industrial Products segment, the second earnings driver behind the Automotive Parts segment, the company mainly supplies power transmission belts for industrial machinery, power transmission belts for agricultural machinery, and conveyor belts. It excels particularly in products for agricultural machinery, which Shared Research estimates make up roughly 15–20% of the segment revenue. This strength is largely the product of Bando’s early forays in Asian markets, where it has capitalized on growing demand for such products. Bando supplies its products for industrial machinery nearly exclusively through trading companies, with supply being dictated by orders from these companies. The core operating profit margin in the segment averaged 6.4% over the last five years, lagging the 7.2% for the Automotive Parts segment by only about 1pp.
In the Advanced Elastomer Products segment, precision functional parts account for roughly 65% of segment revenue. The bulk of these are OA equipment parts such as cleaning blades and high-performance rollers for printers and copiers. The remaining 35% of segment revenue comes from parts such as surface films for construction materials and films for medical applications. Unlike parts for automotive or industrial applications, OA equipment parts generate little replacement demand, and struggle due to the impact of dwindling demand for paper-based printing. In the non-reportable Other Business segment, Bando engages in medical equipment and robotics-related devices operations. The core medical equipment operations are mainly handled by a subsidiary that was brought into the group through an acquisition.
Earnings trends
In FY03/22, revenue was JPY93.7bn (+15.2% YoY), core operating profit was
JPY5.9bn (+19.1% YoY), operating profit was JPY2.7bn (-50.4% YoY), and profit attributable to owners
of the parent was JPY1.2bn (-69.3% YoY). Revenue and profit were up across all
three major segments, and the core operating profit margin was 6.3% (+0.2pp YoY). In Q4 (January–March 2022),
the company recorded one-time operating expenses of JPY1.3bn, but core operating profit rose for the first time
in two years. Similarly, the company booked JPY4.3bn in impairment losses in
Q4, causing operating profit and bottom-line profit to drop YoY. The company plans to award
annual dividends of JPY40.0 per share (JPY26.0 per share in FY03/21), resulting in a temporarily high payout ratio of 148.6%.
The company’s forecast for FY03/23 calls for revenue of JPY95.0bn (+1.3%
YoY), core operating profit of JPY7.0bn (+19.0% YoY), operating
profit of JPY7.5bn (approximately 2.8x the FY03/22 amount), profit
attributable to owners of the parent of JPY5.0bn (4.1x), and EPS of JPY112.3. Assuming growth across all three
main segments, including Automotive Parts, the company forecasts record-high
levels of revenue, core operating profit, and operating profit (since moving to IFRS). The company also expects a record-high core operating profit margin, of 7.4%. The company anticipates annual
dividends of JPY44.0 per share, which would result in a payout ratio of 39.2%.
Bando embarked on its medium- to long-term management plan “Breakthroughs for the future” in FY03/14. It has completed the first stage of the plan (BF-1: FY03/14–FY03/18) in FY03/18, and entered the fourth year of the plan’s second stage (BF-2: FY03/19–FY03/23). In the BF-2 stage, it aims to prioritize new business creation while focusing on core business expansion, enhancement and evolution in manufacturing, and work style innovation for both individuals and the organization. To offset the waning use of automotive power transmission belts due to the electrification of vehicles, the company plans to promote the adoption of its products in new fields, persuade customers to switch over to its belts, and create new businesses such as electronic products and medical and healthcare equipment. By FY03/23, Bando targets revenue of JPY120.0bn (JPY90.8bn in FY03/18), core operating profit of JPY12.0bn (JPY6.7bn), and ROE of 12.0% (8.3%). It also looks to bring the revenue share for new businesses and products up to 30%.
Strengths and weaknesses
Shared Research thinks the company has the following strengths:
Leading position in niche market, and ability to maintain barriers to entry via proprietary materials processing technologies developed as a chemicals manufacturer
Business model that generates reliable replacement demand for belts, contributing to sales of repair parts
Strong business foundations overseas, especially in Asia, developed by taking advantage of insights from early overseas forays
We think it has the following weaknesses:
Structural challenge mainly in the form of dwindling demand for automotive power transmission belts driven by the growing adoption of electric vehicles (EVs) and full-hybrid vehicles
Lower profitability than competitors due to a broad range of products supplied through core belt operations and an insufficient focus on specific products
Difficulty applying the business model of its Automotive Parts segment, which generates profit from repair parts, to its office automation equipment-related operations due to a gradual decline in demand for printing caused by the transition to paperless offices
Profit attributable to owners of the parent: JPY1.2bn (-69.3% YoY; JPY4.5bn)
EPS was JPY26.9. The company plans to pay a year-end
dividend of JPY24.0 per share, resulting in annual dividends of JPY40.0bn per share (JPY26.0 per share for FY03/21). This would result in a payout
ratio of 148.6% (30.0% in FY03/21).
Revenue rose in the three main segments (Automotive Parts, Industrial Products, and Advanced Elastomer Products), outpacing the
company’s forecast for the year and growing 15.2% YoY. Revenue was JPY93.7bn,
the second-highest level since transitioning to IFRS-based disclosure in FY03/19
(retroactive application for FY03/18).
Core operating profit recovered, growing 19.1% YoY as a result of higher
revenue and cost cutting, and settling generally in line with company
expectations. The core operating profit margin rose 0.2pp YoY, to 6.3%. Core operating profit was affected by one-time operating expenses of JPY1.3bn recorded in Q4 (January–March 2022), as the company revised
its bonus system. Effectively, therefore, Shared Research understands that core
operating profit reached the highest level since the transition to IFRS
reporting, outpacing the previous high of JPY6.7bn (FY03/18). The company had factored
the spike in operating expenses into its forecast.
Operating profit fell 50.4% YoY. This decline was attributable to the revisions to the
bonus system described above (a temporary jump in operating
expenses), as well as impairment losses (goodwill, US business) of JPY4.3bn recorded in Q4.
Q4 (three months, January–March 2022)
The company reported the following results for Q4 FY03/22 (three months from January to March 2022).
Revenue: JPY24.1bn (+5.9% YoY)
Core operating loss: JPY411mn (profit of JPY1.7bn in Q4 FY03/21)
Core operating profit margin: N.A.
Operating loss: JPY4.4bn (profit of JPY1.9bn Q4 FY03/21)
Loss attributable to owners of the parent: JPY4.3bn (profit of JPY1.4bn in Q4 FY03/21)
In Q4 (three months), revenue rose YoY for the fifth consecutive
quarter, while core operating profit fell YoY (to a loss) for the first time in
nine quarters. The main reason for the core operating loss was a change in the
bonus system, which cause the company to book one-time operating expenses of
JPY1.3bn in Q4 (January–March 2022). The company also recorded impairment losses (goodwill, US business) of JPY4.3bn.
Note: Shared Research plans to update this report following an earnings briefing and interviews with the company.
FY03/23 company forecast (out May 12, 2022)
FY03/21
FY03/22
FY03/23
(JPYmn)
1H
2H
Full-year
1H
2H
Full-year
1H Est.
2H Est.
FY Est.
Revenue
37,116
44,255
81,371
46,144
47,600
93,744
95,000
YoY
-19.7%
0.5%
-9.8%
24.3%
7.6%
15.2%
1.3%
Gross profit
11,022
13,829
24,851
14,693
12,969
27,662
-
YoY
-20.7%
5.1%
-8.2%
33.3%
-6.2%
11.3%
-
Gross profit margin
29.7%
31.2%
30.5%
31.8%
27.2%
29.5%
-
SG&A expenses
9,696
10,216
19,912
10,317
11,465
21,782
-
YoY
-11.6%
-5.8%
-8.7%
6.4%
12.2%
9.4%
-
SG&A ratio
26.1%
23.1%
24.5%
22.4%
24.1%
23.2%
-
Core operating profit
1,325
3,613
4,938
4,376
1,504
5,880
7,000
YoY
-54.9%
55.9%
-6.0%
230.3%
-58.4%
19.1%
19.0%
Core operating profit margin
3.6%
8.2%
6.1%
9.5%
3.2%
6.3%
7.4%
Operating profit
1,436
3,941
5,377
4,847
-2,182
2,665
7,500
YoY
-48.2%
-
161.5%
237.5%
-
-50.4%
181.4%
Operating profit margin
3.9%
8.9%
6.6%
10.5%
-4.6%
2.8%
7.9%
Pre-tax profit
1,415
4,203
5,618
5,077
-1,663
3,414
-
YoY
-45.5%
-
168.2%
258.8%
-
-39.2%
-
Pre-tax profit margin
3.8%
9.5%
6.9%
11.0%
-3.5%
3.6%
-
Profit attributable to owners of the parent
1,028
2,915
3,943
3,798
-2,587
1,211
5,000
YoY
-50.2%
-
478.2%
269.5%
-
-69.3%
312.9%
Profit margin
2.8%
6.6%
4.8%
8.2%
-5.4%
1.3%
5.3%
Exchange rate
USD
105.93
113.05
120.00
THB
3.41
3.45
3.60
CNY
15.65
17.65
18.80
Source: Shared Research based on company data
Orders received
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
(JPYmn)
J-GAAP
J-GAAP
J-GAAP
J-GAAP
J-GAAP
IFRS
IFRS
IFRS
IFRS
Orders received
88,651
95,896
98,304
81,771
83,291
92,118
92,748
89,502
83,508
YoY
6.3%
8.2%
2.5%
-16.8%
1.9%
10.6%
0.7%
-3.5%
-6.7%
Automotive Parts
-
-
-
32,490
33,855
40,283
41,048
38,945
35,633
YoY
-
-
-
-
4.2%
19.0%
1.9%
-5.1%
-8.5%
Industrial Products
-
-
-
31,519
31,992
33,673
34,222
31,899
31,117
YoY
-
-
-
-
1.5%
5.3%
1.6%
-6.8%
-2.5%
Advanced Elastomer Products
-
12,946
15,942
15,254
14,995
15,922
14,728
13,707
12,347
YoY
-
-
23.1%
-4.3%
-1.7%
6.2%
-7.5%
-6.9%
-9.9%
Belts
-
81,711
80,773
-
-
-
-
-
-
YoY
-
-
-1.1%
-
-
-
-
-
-
Power Transmission Belts
56,794
-
-
-
-
-
-
-
-
YoY
12.2%
-
-
-
-
-
-
-
-
Multimedia Parts
8,010
-
-
-
-
-
-
-
-
YoY
6.3%
-
-
-
-
-
-
-
-
Industrial Products
17,909
-
-
-
-
-
-
-
-
YoY
-12.3%
-
-
-
-
-
-
-
-
Chemical Products
4,719
-
-
-
-
-
-
-
-
YoY
23.5%
-
-
-
-
-
-
-
-
Other Business
1,217
1,239
1,589
2,508
2,448
2,240
2,748
4,950
4,410
YoY
25.6%
1.8%
28.2%
57.8%
-2.4%
-8.5%
22.7%
80.1%
-10.9%
Source: Shared Research based on company data
Order backlog
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
(JPYmn)
J-GAAP
J-GAAP
J-GAAP
J-GAAP
J-GAAP
IFRS
IFRS
IFRS
IFRS
Order backlog
8,417
10,359
8,863
9,250
9,729
10,076
8,925
8,186
10,324
YoY
18.4%
23.1%
-14.4%
4.4%
5.2%
3.6%
-11.4%
-8.3%
26.1%
Automotive Parts
-
-
-
3,905
3,870
2,168
1,600
1,642
2,301
YoY
-
-
-
-
-0.9%
-44.0%
-26.2%
2.6%
40.1%
Industrial Products
-
-
-
3,742
4,457
6,353
5,870
5,186
6,149
YoY
-
-
-
-
19.1%
42.5%
-7.6%
-11.7%
18.6%
Advanced Elastomer Products
-
2,240
1,109
1,180
1,261
1,854
1,355
1,279
1,771
YoY
-
-
-50.5%
6.4%
6.9%
47.0%
-26.9%
-5.6%
38.5%
Belts
-
8,068
7,650
-
-
-
-
-
-
YoY
-
-
-5.2%
-
-
-
-
-
-
Power Transmission Belts
4,569
-
-
-
-
-
-
-
-
YoY
17.1%
-
-
-
-
-
-
-
-
Multimedia Parts
1,275
-
-
-
-
-
-
-
-
YoY
16.2%
-
-
-
-
-
-
-
-
Industrial Products
2,093
-
-
-
-
-
-
-
-
YoY
17.7%
-
-
-
-
-
-
-
-
Chemical Products
436
-
-
-
-
-
-
-
-
YoY
71.0%
-
-
-
-
-
-
-
-
Other Business
42
50
103
123
139
123
99
77
101
YoY
-40.0%
19.0%
106.0%
19.4%
13.0%
-11.5%
-19.5%
-22.2%
31.2%
Source: Shared Research based on company data
Overview of company forecast
The company announced its full-year forecast for FY03/23, as follows.
Revenue: JPY95.0bn (+1.3% YoY)
Core operating profit: JPY7.0bn (+19.0% YoY)
Core operating profit margin: 7.4% (+1.1pp YoY)
Operating profit: JPY7.5bn (roughly 2.8x the FY03/22 level)
Profit attributable to owners of the parent: JPY5.0bn (roughly 4.1x the FY03/22 level)
Forecast EPS is JPY112.3. The company plans annual dividends of
JPY44.0 per share (JPY40.0 per share in FY03/22), which would result in a payout ratio
of 39.2% (148.6% in FY03/22).
The company expects to achieve the highest levels of revenue, core operating profit, and operating profit since moving to IFRS-based disclosure, and to maintain its record-high core
operating profit margin. In FY03/22, operating profit and bottom-line profit (profit
attributable to owners of the parent) were both negative as the result of impairment losses. Consequently, in FY03/23 the company
expects a sharp rebound in growth rates for operating profit and bottom-line profit.
Note: Shared Research plans to update this report following interviews with the company.
Company forecasts versus results
Results vs. Initial Est.
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
FY03/22
FY03/23
(JPYmn)
J-GAAP
J-GAAP
J-GAAP
J-GAAP
J-GAAP
IFRS
IFRS
IFRS
IFRS
IFRS
Revenue
Initial Est.
92,000
95,000
100,000
94,000
91,000
94,000
-
-
90,000
95,000
Act.
93,434
95,395
93,272
88,387
91,263
94,318
90,247
81,371
93,744
Diff.
1.6%
0.4%
-6.7%
-6.0%
0.3%
0.3%
-
-
4.2%
Core operating profit
Initial Est.
6,500
-
-
6,000
7,000
Act.
6,503
5,252
4,938
5,880
Diff.
0.0%
-
-
-2.0%
Operating profit
Initial Est.
5,600
5,800
5,800
6,000
6,000
-
-
6,500
7,500
Act.
5,517
4,797
5,960
5,896
6,336
2,056
5,377
2,665
Diff.
-1.5%
-17.3%
2.8%
-1.7%
5.6%
-
-
-59.0%
Pre-tax profit (recurring profit)
Initial Est.
6,000
6,400
6,800
6,400
6,600
7,000
-
-
-
Act.
6,103
5,730
6,363
6,571
6,598
7,166
2,095
5,618
3,414
Diff.
1.7%
-10.5%
-6.4%
2.7%
-0.0%
2.4%
-
-
-
Profit (net income)
Initial Est.
4,000
4,300
4,500
4,500
4,900
5,000
-
-
4,500
5,000
Act.
4,280
3,758
4,386
4,951
4,795
5,457
682
3,943
1,211
Diff.
7.0%
-12.6%
-2.5%
10.0%
-2.1%
9.1%
-
-
-73.1%
Source: Shared Research based on company data
Note: Figures may differ from company data due to differences in rounding methods.
Note: The company did not disclose forecasts at the start of the year in FY03/20 and FY03/21.
Medium- to long-term management plan
BF-1
MTP
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
(JPYmn)
J-GAAP
J-GAAP
J-GAAP
J-GAAP
J-GAAP
Revenue
93,434
95,395
93,272
88,387
91,263
YoY
8.9%
2.1%
-2.2%
-5.2%
3.3%
Operating profit
5,517
4,797
5,960
5,896
6,336
YoY
34.8%
-13.1%
24.2%
-1.1%
7.5%
Operating profit margin
5.9%
5.0%
6.4%
6.7%
6.9%
ROE
9.4%
7.2%
7.9%
8.6%
8.1%
BF-2
MTP
FY03/18
FY03/19
FY03/20
FY03/21
FY03/22
FY03/23
(JPYmn)
IFRS
IFRS
IFRS
IFRS
Est.
MTP
Revenue
90,798
94,318
90,247
81,371
90,000
120,000
YoY
-
3.9%
-4.3%
-9.8%
10.6%
33.3%
Core operating profit
6,688
6,503
5,252
4,938
6,000
12,000
YoY
-
-2.8%
-19.2%
-6.0%
21.5%
100.0%
Core operating profit margin
7.4%
6.9%
5.8%
6.1%
6.7%
10.0%
ROE
8.1%
8.2%
1.0%
5.9%
-
12.0%
Source: Shared Research based on company data
Note: The company has adopted IFRS accounting from FY03/19 (it released figures under IFRS and Japanese GAAP in FY03/18).
Overview of medium- to long-term management plan
The company embarked on its current medium- to long-term plan “Breakthroughs for the future” in FY03/14. It has completed the first stage of the plan (BF-1: FY03/14–FY03/18) in FY03/18, and entered the fourth year of the plan’s second stage (BF-2: FY03/19–FY03/23). In the BF-2 stage, the company aims to prioritize new business creation while focusing on core business expansion, enhancement and evolution in manufacturing, and work style innovation for both individuals and the organization. By FY03/23, it targets revenue of JPY120.0bn (JPY90.8bn in FY03/18), core operating profit of JPY12.0bn and (JPY6.7bn), and ROE of 12.0% (8.3%). It also looks to bring the revenue share for new businesses and products up to 30%.
Reflection on BF-1 stage
In May 2013, the company unveiled the new medium- to long-term plan “Breakthroughs for the future” that spans the period from FY03/14 to FY03/23. To realize its vision for the group in 10 years, it will concentrate on implementing the following three strategies.
Refine the core technologies and reliable quality of its rubber, elastomers, and resin products, which the company has developed since its founding
Provide notable value-added products across the world that contribute to environmental preservation, energy conservation, and higher functionality
Become a standout global supplier in the belt and functional products fields
The plan is divided into two five-year stages: BF-1 and BF-2. In the BF-1 stage, the company followed five guidelines, which are summarized below.
Evolution of global market strategy
Bando aspired to become the leader in belt products in Asia, which is a region of strategic importance for the company. To this end, it aimed to expand its production capacity at existing production bases (such as in Thailand and Indonesia), while concurrently ramping up production in bases in emerging markets (such as in India and Vietnam). It also worked to broaden its business area in China and the ASEAN markets, and focused on market development in regions alongside the Mekong river.
In Japan, the company aimed to develop high-performance products in line with market needs, strengthen its brand recognition in the value chain provided by its sales network that is rooted in close ties with customers, and expand peripheral businesses with a focus on the aforementioned core products. As an improvement measure to achieve this, Bando strengthened originality in its strategic products, including those under development, and made modular proposals that combined even higher performance for core products with peripheral products to meet the needs of its customers. In core products, the company indicated it would provide stability and reliably to customers by expanding its value chain with design, installation, monitoring, and inspection functions.
Evolve products
The company aimed to promote the development of products with optimal market specifications tailored to the needs of its customers in various global regions, continually launch products notable for their reduced environmental load, high efficiency, compact design, and multifunctionality, and cultivate new markets accordingly.
Evolve manufacturing
To increase customer trust, the company strived to further reduce the rate of defective products across all the production lines of its plants, and achieve high cost-competitiveness. To this end, it worked to reinforce its Bando Production System (BPS) activities, and replaced some of its existing production lines with new ones.
Create new businesses
The company aimed to enhance core technologies that compound, disperse, and combine rubber, elastomers, resin, and other materials to facilitate their applications in targeted strategic markets (such as optoelectronics, energy, and robotics). In addition, it looked to create new products through original technologies formed by fusing these core technologies with new ones and cultivate new businesses that could serve as next-generation drivers.
Evolve quality of management
The company worked to strengthen its business portfolio management centered on strategic investments in growth products and the elimination of loss-making products and businesses. It aimed to step up management oversight at the consolidated level, strengthen the training of staff, and reinforce its financial position (measures to eliminate net interest-bearing debt and deal with forex and interest rate fluctuations).
Numerical targets for the BF-1 stage and outcomes (financial targets based on Japanese GAAP)
During the five years of the BF-1 stage, the company budgeted JPY25.0bn in capital investment and JPY5.0bn in R&D investment for new products, and aimed to achieve the following numerical targets in the final year (FY03/18).
Revenue: JPY100.0bn
Operating profit: JPY10.0bn (operating profit margin of 10%)
Ratio of new products: 30%
ROA: 6%
The FY03/18 results were as follows.
Revenue: JPY91.3bn (JPY85.8bn in FY03/13)
Operating profit: JPY6.3bn (JPY4.1bn in FY03/13)
Ratio of new products: 12.8%
ROA: 7.0% (5.9% in FY03/13)
The FY03/18 results exceeded the FY03/13 figures, but finished below the BF-1 targets. As reasons for the shortfall, the company cited lower-than-expected sales in China and South Korea, delays in the development and market launches of new products, and an increase in SG&A expenses caused by higher R&D and other expenses related to IT investment and new businesses. Shared Research understands that earnings during the five-year period were affected by major changes in external factors in the China business (both on the production and sales fronts), the stock market turbulence in China in 2015, and trade friction between the US and China after the Trump administration assumed office. However, Bando also made tangible progress in many areas during the period, reducing costs by installing new production lines at its main plants and launching new products in areas that it had previously not explored (such as medical equipment and electronic products).
Based on the outcomes of the BF-1 stage and the outstanding challenges, the company announced a BF-2 stage that spanned the five years from FY03/19 to FY03/23.
Four guidelines of BF-2 stage
The company will pursue the following four guidelines as its basic strategy to achieve its vision for the BF-2 stage.
Guideline 1: New business creation
The company will work to prioritize the allocation of management resources to activities that create new businesses, and reshuffle its existing business portfolio accordingly. To this end, it has defined the following markets, strategic areas, and key products as its primary targets.
Display field: Bando expects demand for various types of display to expand in tandem with growing uptake in vehicles.
Power electronics field: This field encompasses technologies related to power conversion and control. The company will target thermal management technologies (such as heat and temperature management), which are in high demand.
Medical, welfare, and nursing care markets: The company expects societal aging to drive further growth in these markets.
Bando will also aim to expedite the commercialization of promising products that have already enjoyed some success. Specifically, it will work to strengthen market adoption of product lines developed and launched into the market in the BF-1 stage. To that end, the company will strive to step up initiatives aimed at facilitating expanded use of these products among overseas customers; complete quality designs and refine its production and manufacturing technologies; and pursue commercialization of upgraded products underpinned by fresh concepts.
Guideline 2: Core business expansion
The company plans to strengthen its operations in strategic industries in select regions. It aims to improve customer convenience by providing products with high value. In this way, it looks to capture top market shares in its targeted strategic markets. To gain further customer recognition, it will pursue the following three activities.
Market map activities
The company aims to participate in the strategic markets it has identified as a leading company, and stay ahead of its competitors. These activities are most essential in Bando’s view.
Technical map activities
The company will continue to develop products differentiated by their energy-saving properties and reduced environmental load, while enhancing their functions in line with market needs.
Customer convenience improvement activities
The company will increase its brand recognition and expand its value chain by proposing products and services to customers that improve their convenience.
Guideline 3: Enhancement and evolution in manufacturing
The company aims to grow its core businesses on a global scale, and evolve its manufacturing technology and systems to enhance profitability. It looks to keep its consolidated cost of revenue ratio below 70% and views this numerical target as most important in terms of improving its earnings power. Concrete measures it will implement toward this end are: developing innovative manufacturing methods; promoting the use of the Internet of Things (IoT) and artificial intelligence (AI) at its plants; and pursuing reductions in the manufacturing costs via optimization. The company will develop innovative production methods for its core power transmission belts in Japan, and roll these out horizontally at its overseas production bases along with automated production lines. It will strive to reduce work hours through IoT solutions and expand the use of AI robots. It will streamline its products and material lineups, reduce materials costs, and optimize its global distribution.
Guideline 4: Work style innovation for both individuals and the organization
The company will seek to promote autonomous and creative work styles by providing work environments and systems, and by training staff and fostering awareness. It believes these work style reforms are necessary to underpin the successful execution of guidelines 1–3. At the same time, it will work to keep its SG&A ratio below 20%, while also strengthening its management base.
Numerical targets for BF-2 stage (financial targets presented on IFRS basis)
Through the successful implementation of guidelines 1–4, the company aims to achieve the following targets in FY03/23, the final year of the BF-2 stage.
Revenue: JPY120.0bn (JPY90.8bn in FY03/18)
Core operating profit: JPY12.0bn (JPY6.7bn in FY03/18)
Core operating profit margin: 10% (7.4% in FY03/18)
ROE: 12% (8.3% in FY03/18)
Revenue share for new businesses and products: 30% or above (particularly, revenue share for new businesses of 10% or above)
To achieve these targets, it budgets JPY30.0bn in capital investment (compared with JPY23.6bn in the BF-1 stage) and JPY25.0bn in R&D expenses (JPY20.1bn) over the five years of the B-2 stage. It forecasts depreciation of JPY25.0bn (JPY21.2bn). It plans to increase revenue by about JPY29.2bn over the five-year period, breaking down into increases of JPY17.2bn from existing businesses and JPY12.0bn from new businesses.
Changes in revenue composition
In accordance with its plan, the company looks to increase revenue from JPY41.6bn (FY03/18, same below) to roughly JPY44.0bn (FY03/23, same below) in the Automotive Parts segment (implying a drop in revenue share from 45.8% to roughly 36.6%), from JPY31.8bn to about JPY44.0bn in the Industrial Products segment (implying a rise in revenue share from 35.1% to around 36.6%), from JPY15.1bn to roughly JPY23.0bn in the Advanced Elastomer Products segment (implying a rise in revenue share from 16.7% to about 19.2%), and from JPY2.2bn to roughly JPY9.0bn in the Other Business segment (implying a rise in revenue share from 2.5% to 7.5%). In other words, these changes will alter Bando’s existing revenue composition. (Note that the data above in part reflects estimates by Shared Research.)
Progress to date
Since Bando formulated its BF-2 plans, the external environment surrounding its businesses has taken a sharp turn for the worse. It remains unclear how the trade friction between the US and China will evolve under the Biden administration, which came into power in 2021. Bando has been affected by the COVID-19 pandemic, which is a factor the company had no knowledge of when it drew up its plans. The impact of the pandemic intensified from January 2020, eroding revenue in existing businesses in FY03/20 and FY03/21. In Japan, revenue is gradually returning to pre-pandemic levels as a result of progress with vaccinations, but the pandemic has yet to be contained in Southeast Asia, which is one of the company’s earnings drivers. At present, Bando has left its numerical targets for FY03/23 unchanged, but attaining its revenue growth target for existing businesses (increase of JPY17.2bn from FY03/18) has become a challenge.
At the same time, the company has achieved steady progress in new businesses and new products. Such results are starting to appear particularly in the medical and healthcare equipment business, which is a focus area for Bando.
The medical and healthcare equipment business is mainly led by Aimedic MMT Co., Ltd., a wholly owned subsidiary acquired by the company in May 2019. Aimedic MMT excels in selling orthopedic medical devices, an area in which it has built high brand recognition. It is currently working on several development projects that fuse the core rubber, elastomer, and resin technologies of Bando. One of these projects involves expanding sales of the elastic strain sensor C-STRETCH that was commercialized during the BF-1 stage. C-STRETCH is a novel type of sensor developed by the company using elastic, conductive elastomer material. It allows detection of various strains through superior elasticity and flexibility, and is used to measure movements and biometric information. Bando aims to leverage synergies with Aimedic MMT to establish a medical and healthcare equipment business with C-STRETCH as a flagship product.
Meanwhile, the company is also making steady headway in the electronic products business, another pillar of its new businesses. It is starting to see effects from business growth for its optical clear adhesive Free Crystal for automotive applications, and from its precision polishing material TOPX for displays. In addition, Bando is focusing on expanding sales of its high thermal conductive sheet HEATEX.
Medium- to long-term strategy (Automotive Parts segment)
The first guideline of the BF-2 stage of Bando’s medium- to long-term plan is to create new businesses. The company therefore aims to prioritize the allocation of management resources to activities that create new businesses and reshuffle its existing business portfolio. Its focus on new business creation is mainly driven by a sense of urgency surrounding the decline in its mainstay Automotive Parts segment.
The function of automotive power transmission belts, whether used to drive accessories or camshafts, is to transmit the power of an engine to various parts or locations of the vehicle. However, the ongoing electrification of vehicles has given rise to electric vehicles (EVs) that do away with the classical engine and instead derive their power from a battery and motor. As a result, these vehicles no longer require power transmission belts. Even among hybrids, a category of vehicles with a growing market size that is essentially a stepping stone toward EVs, there are some full-hybrid models (vehicles equipped with a hybrid system that allows them to run on motor power alone for limited periods of time) such as the Toyota Prius that no longer use power transmission belts. The resulting decline in power transmission belts for new vehicles will inevitably also depress demand for belts for repairs in the future.
To overcome these challenges, the company is currently pursuing the following strategies.
Capture demand from mild hybrids
Not all automakers are capable of offering full hybrids such as the Toyota Prius. From a cost perspective or parts (particularly, battery) procurement standpoint, Bando expects demand for mild hybrid vehicles to expand during the transition period the industry needs to fully migrate toward EVs. Mild hybrids cannot run on motor power alone, and therefore require power transmission belts like vehicles with internal combustion engines. Shared Research understands that belts for mild hybrids need to deliver superior heat resistance and durability, as a result of which the company can sell them at a premium of 10% or more over existing belt products. Automakers such as Suzuki Motor, Mazda Motor, and Mitsubishi Motors all manufacture mild hybrids, and Shared Research understands these vehicles are likely to gain further traction not only in Japan but across the world. That said, Bando recognizes that mild hybrids can only serve as a transitory source of demand until all-electric vehicles become the standard, so it has no intention of making such vehicles a pillar of its operations.
Capture demand for new applications
The electrification of vehicles has started to drive demand for new types of power transmission belts. For example, such belts are now being considered for use in electric parking brakes, and already starting to be adopted in power steering and doors. These developments reflect a recognition of the properties of power transmission belts, particularly their high transmission efficiency and quiet operation. Bando expects demand for belts for new applications to further expand in the future.
Capture new demand for products other than belts
Among non-belt products, Bando concentrates on automotive functional films, and it is currently working to increase adoption and sales of its optical clear adhesive (OCA) film for automotive displays, and decorative films for interior materials. The company expects new demand for such products to emerge progressively as automakers seek to increase the visibility of the increasingly diverse information displayed on automotive displays and to enhance cabin comfort. In addition, among new demand sources stemming from the transition to EVs, Bando mainly concentrates on heat dissipation sheets. Vehicles in the future are expected to generate more heat due to increased usage of precision parts in tandem with advances in electrification, and this trend is likely to raise demand for thermal management solutions to prevent defects. With this in mind, the company is working to commercialize its high thermal conductive sheet HEATEX, which facilitates efficient thermal management.
Expand existing businesses with focus on repair market
Bando controls a sizeable share of the Japanese market for repair parts, but its global share in this market has lagged its domestic share, so the company sees significant room for future growth in its repair operations overseas. Aside from Japan, it focuses much of its attention on operations in China, the US, and India. Not all countries in the world are actively pursuing the electrification of vehicles, and many regions have also fallen behind with related initiatives. A prime example of this is the US, which is the world’s largest car market (second-largest market for new vehicle sales with roughly 17.5mn units sold per year, and largest market by car ownership, with 285.0mn vehicles owned). Bando has established a global supply structure with four strategic regions, and its bases in the US and Mexico make up one of these (only the base in the US has manufacturing capacity). However, its presence in this region remains small compared with Japan and other Asian nations. Although the company faces competition from powerful local rivals such as Gates Corporation and Dayco Products, Shared Research understands that Bando has considerable room to further leverage its existing bases.
While the general push for the electrification of vehicles, which includes the transition to EVs, has major implications, it is not the case that all vehicles will go all-electric by a certain date. Neither is it plausible that all vehicles currently in circulation (78.5mn in Japan, roughly 1.4bn worldwide) will be declared unusable by a certain date. Shared Research understands that Bando is ahead of competitors such as Mitsuboshi Belting in its efforts to prepare for future changes in the automotive landscape.
Medium- to long-term strategy (Industrial Products segment)
The Industrial Products segment is the second pillar of the company’s operations. Unlike the mainstay Automotive Parts segment, which is being affected by the inexorable rise of electrification in the automotive industry, the Industrial Products segment faces few pressing management challenges. However, Bando recognizes that similar challenges may emerge in the prevailing environment that calls for reductions in power generation from fossil fuels (carbon-neutral society) and in the environmental load. To prepare for such potential changes, the company is pursuing a medium- to long-term strategy in the segment.
Achieving success in belts for large agricultural machinery amid focus on priority industries
In the Industrial Products segment, Bando supplies products to a broad range of customers in diverse industries. However, it views robotics, semiconductor production equipment, machine tools, agricultural machinery, and financial terminals as strategic targets in focus industries. While it is making steady headway in each of these fields, it has always excelled in products for agricultural machinery. Shared Research understands that the profit margins generated on belts for agricultural machinery exceed the segment profit margin (core operating profit margin of 7.4% in FY03/21), and that this is attributable to the company’s high share of supply to Japanese original equipment manufacturers, the high belt quantities needed for agricultural machinery (multiple belts required per piece of machinery), and Bando’s strength in selling own-brand repair products.
Climate change has led to global issues such as food shortages that are apparent in the recent surge in food prices. The company therefore believes that demand for agriculture will expand further going forward. At the same time, farming populations (i.e., the number of workers that engage in agriculture) are shrinking, particularly in developed nations, so the dependence on agricultural machinery is bound to increase. Against this backdrop, research firm Global Information expects the global agricultural machinery market to expand at a CAGR of 4.2% from USD92.2bn in 2020 to USD113.0bn in 2025.
Bando believes the growth in demand for agricultural machinery belts will be driven by large machinery, and it concentrates on expanding belts for large machinery used to cultivate crops, which represent a larger market than their counterparts to cultivate rice. It has already finished preparations for production lines (Phase 1), and started supply to major local manufacturers in overseas growth markets. Bando is also working to expand repair sales for large agricultural machinery. It has announced growing sales of belts for large agricultural machinery in China, both to original equipment manufacturers as well as in the repair market. The company expects demand for large agricultural machinery to grow particularly in the US and China as both countries have large populations and land areas, and it therefore targets these markets under its medium to long-term strategy.
Launch and expand sales of new light-duty conveyor belts that take advantage of materials processing technology
Light-duty conveyor belts are another area the company is focused on. Bando is one of just a handful of large manufacturers of conveyor belts in Japan. However, in the previously thriving market for large conveyor belts, demand from the steel and other industries has plateaued. For this reason, the company has added high-margin sealed conveyor products to its lineup, and it is working to move from a product sales-centric business model to one that expands services. In addition to such measures, Bando is focusing on light-duty conveyor belts, a market poised for expansion. It has launched and is stepping up sales of its “Mr.” series of light-duty conveyor belts (Mr. Spike in 2019 and Mr. Non-Stick in 2020). It is also releasing new belts that take further advantage of its materials processing technology to enhance properties such as grip, durability, and adhesive support.
Shared Research understands that the medium- to long-term strategy for the Industrial Products segment not only entails driving growth for the segment but also offsetting the decline in sales in the Automotive Parts segment, which is currently in a transition phase as cars become increasingly electrified.
Business
Business model overview
Bando is Japan’s largest manufacturer of power transmission and conveyor belts. In FY03/21, it reported revenue of JPY81.4bn and core operating profit of JPY4.9bn. The mainstay Automotive Parts segment posted revenue of JPY35.0bn and core operating profit of JPY2.4bn (accounting for 43.0% and 48.3%, respectively, of total revenue and total core operating profit), the Industrial Products segment revenue of JPY30.2bn and core operating profit of JPY2.2bn (37.1%, 45.3%), the Advanced Elastomer Products segment revenue of JPY11.9bn and a core operating loss of JPY129mn (14.6%, N/A), and the Other Business segment revenue of JPY4.4bn and core operating profit of JPY339mn (5.4%, 6.9%). Shared Research estimates belt-related revenue came to JPY65.0–68.0bn, 20–25% above the JPY54.4bn reported by Mitsuboshi Belting (TSE1: 5192), the second-largest belt supplier in Japan.
Types of power transmission belts and their functions
The power transmission belts manufactured and sold by Bando are made of rubber or urethane, and their function is to transmit power of an engine or motor. They are mainly used in automobiles and industrial machinery.
Bulk of the automotive power transmission belts are accessory drive belts (V-belts and V-ribbed belts)
The lion’s share of the power transmission belts used in automobiles are accessory drive belts (fan belts), which drive automotive accessories* by running over pulleys. Synchronous belts, which rotate camshafts**, are another type of automotive belts.
*Accessories: A general term for peripheral devices that are necessary to drive the main engine. Examples of automotive accessories are alternators, power-steering pumps, and water pumps. **Camshafts: Rods that are responsible for opening and closing the engine valves at the appropriate times.
Accessory drive belts are broadly divided into V-belts and V-ribbed belts. Flat belts are another type of accessory drive belts, but their use within the automotive industry is currently limited to some diesel engine vehicles. V-belts first appeared on the scene in the early 1970s, followed by V-ribbed belts in the late 1980s. Since then, belts have continued to evolve through a diversification of the rib shape designed to grip the pulley. At present, V-belts are predominantly employed in diesel engines and V-ribbed belts in gasoline engines. Another difference in application is that V-belts are used in trucks (commercial vehicles), while V-ribbed belts are used in passenger cars. V-ribbed belts for passenger cars have three or four ribs for light vehicles, six ribs for vehicles with 2-liter engines, seven ribs for vehicles with 3-liter engines, and eight or more ribs for vehicles with 4-liter-plus engines.
Cross sections of V-belt (left) and V-ribbed belt (right)
Source: Images provided by the company Note: Core wires made of polyethylene terephthalate (PET) or aramid fiber are embedded into adhesive rubber layers to increase strength and durability. The V-ribbed belt on the right has three ribs (three contact surfaces at the bottom). The V-belt on the left has one contact surface. Note: For an illustration of a belt fitted to an engine, refer to the image “Accessory drive belt (V-ribbed belt) inside an engine” in the “Basic business model” section.
Belts have a physical lifespan
The materials used in belts deteriorate over time and therefore have a physical lifespan. V-ribbed belts last longer than V-belts. Modern passenger cars in principle use one accessory drive belt per vehicle.
Automotive synchronous belts at one time were replaced with chains
Synchronous belts are fitted in locations that require resistance to heat, oil, and abrasion, as well as mechanical (tensile) strength, and would therefore struggle to meet the desired quality requirements if they were made of the same materials as V-belts and V-ribbed belts (chloroprene rubber [CR] and ethylene propylene diene monomer [EPDM]). For this reason, they are made of hydrogenated nitrile rubber (HNBR), which ensures a longer lifespan but at a higher cost (about 5x the cost of CR). At one point in the past, synchronous belts were replaced with chains to meet increased heat resistance requirements, and they nearly fell into disuse. Moving into the 2010s, however, automakers revisited this approach amid rising demand for fuel efficiency and thanks to the improved durability and overall performance of synchronous belts, which offer minimal friction loss. As a result, synchronous belts enjoyed a revival, becoming widely used in new fuel-efficient gasoline vehicles with small-displacement engines and diesel vehicles. While Bando manufactures and sells high-strength synchronous belts that drive camshafts, its core products are accessory drive belts (V-belts and V-ribbed belts).
Meanwhile, industrial machinery uses various types of power transmission belts that differ by application, ranging from V-belts to flat belts and toothed belts. It is not uncommon for one piece of industrial machinery to require multiple power transmission belts.
Basic business model
Capture replacement demand for belts (consumables) by providing repair parts
Automotive belts (including for motorcycles), industrial machinery belts, and related peripheral equipment represent Bando’s core operations, accounting for roughly 80% of its revenue. Under its present business model, the company basically manufactures and supplies power transmission belts for new vehicles and industrial machinery, and subsequently captures replacement demand by providing repair parts. Power transmission belts are made of rubber and urethane (two raw materials derived from naphtha), and they are both functional and consumable products. They inevitably deteriorate physically depending on the usage amount and time, and thus generate reliable replacement demand. In addition to wear sustained in the normal course of operation, defects, damage from accidents, and aging are all factors that produce a certain amount of replacement demand.
Establish rapid delivery system by relying on existing network
Timely response to replacement demand, when and where it arises, requires a broad supply network. In Japan, Bando not only supplies products through its own sales network, but also through a nationwide network of specialist trading companies and agents. It has established a supply structure that allows it to rapidly respond to requests, which is the top priority for repair parts needed for replacements. Some of its own-brand products in the Automotive Parts segment and the Industrial Products segment, for which the company has bargaining power, have become established products in their respective industries.
Increase in parts for new vehicles generates subsequent demand for repair parts
In addition, the parts for new vehicles or industrial machinery supplied by Bando subsequently become a major driver of repair part sales. The company takes advantage of its materials processing technology accumulated as a chemicals manufacturer to push bundled system sales that include peripheral parts such as pulleys and tensioners. In Japan, the market for power transmission belts is valued at roughly JPY70.0bn per year. It is a niche market with little prospect for sharp growth. It attracts few new entrants even in the area of product supply for new vehicles. Bando produces and sells power transmission belts while taking advantage of its strengths as the leader in this niche market.
Accessory drive belt (V-ribbed belt) inside an engine
Source: Image provided by the company Note: Pulleys are disc-shaped objects around which belts are wrapped.
Core technologies underpinning business model
Processing technologies for materials such as rubber and elastomers are core technologies
Bando’s basic business model is underpinned by five core technologies it has developed and accumulated since its founding in 1906: rubber materials and processing technology, resin materials and processing technology, urethane materials and processing technology, adhesive technology, and nanoparticle creation technology. The fifth technology in this list is the latest addition to the company’s core technologies. It is being cultivated in connection with new businesses under the medium- to long-term management plan. In other words, the first four core technologies play an important role in the company’s existing belt businesses.
The core accessory drive belts (mainly V-belts and V-ribbed belts) supplied by the company must comply with a broad range of requirements specified by its customers (automakers and machinery manufacturers). Their main function is to transmit power, but they must also deliver high transmission efficiency, quiet operation (low noise), durability (reduced susceptibility to damage or scratching), heat resistance, lightweight design to support fuel efficiency, and cost-effectiveness to undercut overseas rivals. These requirements are tightened every time a manufacturer upgrades the performance of its vehicles or machinery.
Proprietary materials processing technology creates barriers to entry
Bando’s technologies to compound, disperse, and combine rubber, elastomers, and other materials are the core technologies that enable it to meet the diverse needs of its customers. The primary raw materials used to make belts are rubber and urethane but these are rarely used as a single material. Bando possesses technologies that compound or disperse these soft raw materials, or combine them with (glue them to) organic or inorganic materials. Key among these are core technologies such as rubber or elastomer compounding technologies, which are integrated in the company’s processing and production technologies. These compounding technologies are original technologies that cannot be easily emulated by new entrants. In this way, they create a significant barrier to entry.
A parts manufacturer with proprietary materials processing technology
Bando is Japan’s largest manufacturer of power transmission and conveyor belts. Its manufacturing activities are supported by production technologies and compounding, dispersion, and combining technologies for rubber, elastomers, and other materials. The latter categories are the reason the company name includes the word “chemical.” Power transmission belt production requires both the production technologies of a parts manufacturer and materials processing technologies. Accordingly, parts or materials manufacturers that merely possess one of these two sets of technologies cannot enter this industry. Bando has sufficient strengths in both categories.
Automotive Parts
Automotive Parts
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
(JPYmn)
J-GAAP
J-GAAP
IFRS
IFRS
IFRS
IFRS
Production
44,606
43,223
41,170
40,841
37,235
33,160
Orders received
32,490
33,855
40,283
41,048
38,945
35,633
Order backlog
3,905
3,870
2,168
1,600
1,642
2,301
Revenue
42,750
40,232
41,606
41,615
38,902
34,974
YoY
N.A.
-5.9%
N.A.
0.0%
-6.5%
-10.1%
Segment profit
3,323
2,937
3,401
3,182
2,129
2,386
YoY
N.A.
-11.6%
N.A.
-6.4%
-33.1%
12.1%
Segment profit margin
7.8%
7.3%
8.2%
7.6%
5.5%
6.8%
Capital investment
1,736
2,050
2,956
2,369
2,049
1,663
Depreciation
2,432
2,171
2,044
2,469
2,593
2,607
Loss on retirement of fixed assets
0
0
0
0
0
0
No. of employees
2,401
2,546
2,634
2,599
2,530
2,535
Revenue per employee (JPY'000)
N.A.
16,265
16,064
15,905
15,169
13,810
Profit per employee (JPY'000)
N.A.
1,187
1,313
1,216
830
942
R&D expenses
1,383
1,426
1,375
1,124
1,132
1,034
R&D expense ratio
3.2%
3.5%
3.3%
2.7%
2.9%
3.0%
Source: Company’s securities reports, results briefing materials, and other data
Note: The company transitioned to IFRS in FY03/19, so it did not release YoY comparisons with FY03/18.
Note: Segment profit reflects operating profit through FY03/17, and core operating profit from FY03/18.
Note: The company only announces aggregate R&D expenses for the Automotive Parts and Industrial Products segments. Shared Research has broken down and allocated the R&D expenses to each segment in proportion to their revenue.
Overview
The Automotive Parts segment (which also covers motorcycle products) is the core business of the company. In FY03/21, it posted revenue JPY35.0bn (43.0% of the consolidated level), segment profit of JPY2.4bn (48.3%), and a segment profit margin of 6.8%. Operations in Japan accounted for 31.5% of segment revenue and overseas operations for 68.5% (of which Asia made up 56.4% and Europe, the US, and all other regions 12.1%). Overseas revenue is the revenue amount generated by the company’s overseas bases. Shared Research estimates products for motorcycles make up roughly 20% of segment revenue.
The business model for the segment is described in the Basic business model section.
Executive summary
Business overview
Bando Chemical Industries is Japan’s largest manufacturer of power transmission* and conveyor belts. The Japanese market for power transmission belts is worth about JPY50.0bn and the global market about JPY400.0bn (Shared Research estimates based on Ministry of Economy, Trade and Industry [METI] data; market price basis). While the domestic production shipment value for such products has declined from JPY55.1bn in 2011 to JPY42.9bn in 2020 (compound annual decline rate of 2.5%), the overseas market is worth 6–7x the domestic market by our estimates, and therefore offers considerable room for growth. Bando has a leading domestic market share of about 50% in accessory drive belts** for automobiles, and a global market share of roughly 20%, making it the world’s third largest supplier of such products (Shared Research estimate). In non-automobile products, the company leads the global market for variable speed belts with a share of over 50%. These are used extensively by Honda Motor (TSE1: 7267) in its motorcycles, especially small scooters.
In FY03/21, revenue was JPY81.4bn and core operating profit JPY4.9bn. By segment, the mainstay Automotive Parts segment made up 43.0% of total revenue (48.3% of total core operating profit), the Industrial Products segment 37.1% (45.3%), the Advanced Elastomer Products segment 14.6% (core operating loss of JPY129mn), and the Other Business segment 5.4% (6.9%). Shared Research estimates belt-related revenue totaled roughly JPY65.0–68.0bn, 20–25% above the JPY54.4bn reported by Mitsuboshi Belting (TSE1: 5192), the second-largest belt supplier in Japan.
In FY03/21, overseas revenue was JPY39.2bn (48.2% of total revenue; CAGR of 1.2% from JPY34.7bn in FY03/11). Asia accounted for 37.3%, and Europe, the US, and all other regions for 11.0%. Bando has been active overseas for many years. It set up representative offices in the US and Germany in 1969, converted both into local subsidiaries in 1978, and subsequently moved into Asia. Drawing on the insights gained from these early overseas forays, it has expanded its overseas presence with a focus on Asia. Today, Bando operates a global supply structure with four strategic regions: Asia (17 bases), North America (two bases), Europe (three bases), and Japan. The company continually looks for opportunities to grow its overseas operations in existing and new regions, and monitors the efficiency of its existing bases. It plans to further increase its footprint abroad while adjusting its number of overseas bases. Shared Research understands that Bando generates nearly half of its core operating profit from its overseas business, mainly from its operations in Asia, where the company can capture demand for automotive, motorcycle, and agricultural machinery products. Incidentally, the first overseas plant of a Japanese automaker came online in the UK in 1982.
Accessory drive belts for automotive engines (chiefly V-belts and V-ribbed belts) are functional products made of rubber or urethane. They are consumables that deteriorate in proportion to the distance traveled. For this reason, accessory drive belts supplied for new vehicles inevitably generate replacement demand after a few years, contributing to sales of repair parts. Repair parts can be broken down into genuine parts supplied directly to automakers, and own-brand products supplied to car product retailers and repair shops via specialist trading companies. Bando commands a high share of the domestic market for repair parts, and domestic car ownership—an indicator of latent demand for repair parts—has consistently trended up over the last 10 years, reaching a record-high 78.3mn vehicles at end-March 2021. In addition, the average period car owners hold on to their vehicles has lengthened (from 9.26 years in 1990 to 13.87 years in 2021, in the case of passenger vehicles), and this has fueled high levels of replacement demand.
Accessory drive belts must meet certain benchmarks in terms of durability, thermal resistance, quiet operation, lightweight design, and low costs. Achieving these requires compounding, dispersion, and combining technologies for raw materials, and Bando possesses proprietary materials processing technologies. Raw materials costs are the largest component of its manufacturing costs (roughly 50%), and changes in the naphtha price affect its earnings with a lag of three to four months. While Bando generally attempts to pass on increases in raw material prices to its customers (mainly automakers), it is not always able to avert short-term impact. However, because its materials processing technologies often give it an edge in price negotiations, the company is sometimes able to increase prices midway through a fiscal year. Conversely, drops in raw material prices drive up earnings, but also gradually increase downward pressure on prices from customers.
In the Industrial Products segment, the second earnings driver behind the Automotive Parts segment, the company mainly supplies power transmission belts for industrial machinery, power transmission belts for agricultural machinery, and conveyor belts. It excels particularly in products for agricultural machinery, which Shared Research estimates make up roughly 15–20% of the segment revenue. This strength is largely the product of Bando’s early forays in Asian markets, where it has capitalized on growing demand for such products. Bando supplies its products for industrial machinery nearly exclusively through trading companies, with supply being dictated by orders from these companies. The core operating profit margin in the segment averaged 6.4% over the last five years, lagging the 7.2% for the Automotive Parts segment by only about 1pp.
In the Advanced Elastomer Products segment, precision functional parts account for roughly 65% of segment revenue. The bulk of these are OA equipment parts such as cleaning blades and high-performance rollers for printers and copiers. The remaining 35% of segment revenue comes from parts such as surface films for construction materials and films for medical applications. Unlike parts for automotive or industrial applications, OA equipment parts generate little replacement demand, and struggle due to the impact of dwindling demand for paper-based printing. In the non-reportable Other Business segment, Bando engages in medical equipment and robotics-related devices operations. The core medical equipment operations are mainly handled by a subsidiary that was brought into the group through an acquisition.
Earnings trends
In FY03/22, revenue was JPY93.7bn (+15.2% YoY), core operating profit was JPY5.9bn (+19.1% YoY), operating profit was JPY2.7bn (-50.4% YoY), and profit attributable to owners of the parent was JPY1.2bn (-69.3% YoY). Revenue and profit were up across all three major segments, and the core operating profit margin was 6.3% (+0.2pp YoY). In Q4 (January–March 2022), the company recorded one-time operating expenses of JPY1.3bn, but core operating profit rose for the first time in two years. Similarly, the company booked JPY4.3bn in impairment losses in Q4, causing operating profit and bottom-line profit to drop YoY. The company plans to award annual dividends of JPY40.0 per share (JPY26.0 per share in FY03/21), resulting in a temporarily high payout ratio of 148.6%.
The company’s forecast for FY03/23 calls for revenue of JPY95.0bn (+1.3% YoY), core operating profit of JPY7.0bn (+19.0% YoY), operating profit of JPY7.5bn (approximately 2.8x the FY03/22 amount), profit attributable to owners of the parent of JPY5.0bn (4.1x), and EPS of JPY112.3. Assuming growth across all three main segments, including Automotive Parts, the company forecasts record-high levels of revenue, core operating profit, and operating profit (since moving to IFRS). The company also expects a record-high core operating profit margin, of 7.4%. The company anticipates annual dividends of JPY44.0 per share, which would result in a payout ratio of 39.2%.
Bando embarked on its medium- to long-term management plan “Breakthroughs for the future” in FY03/14. It has completed the first stage of the plan (BF-1: FY03/14–FY03/18) in FY03/18, and entered the fourth year of the plan’s second stage (BF-2: FY03/19–FY03/23). In the BF-2 stage, it aims to prioritize new business creation while focusing on core business expansion, enhancement and evolution in manufacturing, and work style innovation for both individuals and the organization. To offset the waning use of automotive power transmission belts due to the electrification of vehicles, the company plans to promote the adoption of its products in new fields, persuade customers to switch over to its belts, and create new businesses such as electronic products and medical and healthcare equipment. By FY03/23, Bando targets revenue of JPY120.0bn (JPY90.8bn in FY03/18), core operating profit of JPY12.0bn (JPY6.7bn), and ROE of 12.0% (8.3%). It also looks to bring the revenue share for new businesses and products up to 30%.
Strengths and weaknesses
Shared Research thinks the company has the following strengths:
Leading position in niche market, and ability to maintain barriers to entry via proprietary materials processing technologies developed as a chemicals manufacturer
Business model that generates reliable replacement demand for belts, contributing to sales of repair parts
Strong business foundations overseas, especially in Asia, developed by taking advantage of insights from early overseas forays
We think it has the following weaknesses:
Structural challenge mainly in the form of dwindling demand for automotive power transmission belts driven by the growing adoption of electric vehicles (EVs) and full-hybrid vehicles
Lower profitability than competitors due to a broad range of products supplied through core belt operations and an insufficient focus on specific products
Difficulty applying the business model of its Automotive Parts segment, which generates profit from repair parts, to its office automation equipment-related operations due to a gradual decline in demand for printing caused by the transition to paperless offices
Key financial data
Note: The company conducted a 1-for-2 reverse stock split on its common shares on October 1, 2016.
Trends and outlook
Quarterly trends and results
FY03/22 results (out May 12, 2022)
Summary
The company reported the following results for FY03/22.
EPS was JPY26.9. The company plans to pay a year-end dividend of JPY24.0 per share, resulting in annual dividends of JPY40.0bn per share (JPY26.0 per share for FY03/21). This would result in a payout ratio of 148.6% (30.0% in FY03/21).
Revenue rose in the three main segments (Automotive Parts, Industrial Products, and Advanced Elastomer Products), outpacing the company’s forecast for the year and growing 15.2% YoY. Revenue was JPY93.7bn, the second-highest level since transitioning to IFRS-based disclosure in FY03/19 (retroactive application for FY03/18).
Core operating profit recovered, growing 19.1% YoY as a result of higher revenue and cost cutting, and settling generally in line with company expectations. The core operating profit margin rose 0.2pp YoY, to 6.3%. Core operating profit was affected by one-time operating expenses of JPY1.3bn recorded in Q4 (January–March 2022), as the company revised its bonus system. Effectively, therefore, Shared Research understands that core operating profit reached the highest level since the transition to IFRS reporting, outpacing the previous high of JPY6.7bn (FY03/18). The company had factored the spike in operating expenses into its forecast.
Operating profit fell 50.4% YoY. This decline was attributable to the revisions to the bonus system described above (a temporary jump in operating expenses), as well as impairment losses (goodwill, US business) of JPY4.3bn recorded in Q4.
Q4 (three months, January–March 2022)
The company reported the following results for Q4 FY03/22 (three months from January to March 2022).
In Q4 (three months), revenue rose YoY for the fifth consecutive quarter, while core operating profit fell YoY (to a loss) for the first time in nine quarters. The main reason for the core operating loss was a change in the bonus system, which cause the company to book one-time operating expenses of JPY1.3bn in Q4 (January–March 2022). The company also recorded impairment losses (goodwill, US business) of JPY4.3bn.
Note: Shared Research plans to update this report following an earnings briefing and interviews with the company.
FY03/23 company forecast (out May 12, 2022)
Overview of company forecast
The company announced its full-year forecast for FY03/23, as follows.
Forecast EPS is JPY112.3. The company plans annual dividends of JPY44.0 per share (JPY40.0 per share in FY03/22), which would result in a payout ratio of 39.2% (148.6% in FY03/22).
The company expects to achieve the highest levels of revenue, core operating profit, and operating profit since moving to IFRS-based disclosure, and to maintain its record-high core operating profit margin. In FY03/22, operating profit and bottom-line profit (profit attributable to owners of the parent) were both negative as the result of impairment losses. Consequently, in FY03/23 the company expects a sharp rebound in growth rates for operating profit and bottom-line profit.
Note: Shared Research plans to update this report following interviews with the company.
Company forecasts versus results
Note: Figures may differ from company data due to differences in rounding methods.
Note: The company did not disclose forecasts at the start of the year in FY03/20 and FY03/21.
Medium- to long-term management plan
Note: The company has adopted IFRS accounting from FY03/19 (it released figures under IFRS and Japanese GAAP in FY03/18).
Overview of medium- to long-term management plan
The company embarked on its current medium- to long-term plan “Breakthroughs for the future” in FY03/14. It has completed the first stage of the plan (BF-1: FY03/14–FY03/18) in FY03/18, and entered the fourth year of the plan’s second stage (BF-2: FY03/19–FY03/23). In the BF-2 stage, the company aims to prioritize new business creation while focusing on core business expansion, enhancement and evolution in manufacturing, and work style innovation for both individuals and the organization. By FY03/23, it targets revenue of JPY120.0bn (JPY90.8bn in FY03/18), core operating profit of JPY12.0bn and (JPY6.7bn), and ROE of 12.0% (8.3%). It also looks to bring the revenue share for new businesses and products up to 30%.
Reflection on BF-1 stage
In May 2013, the company unveiled the new medium- to long-term plan “Breakthroughs for the future” that spans the period from FY03/14 to FY03/23. To realize its vision for the group in 10 years, it will concentrate on implementing the following three strategies.
Refine the core technologies and reliable quality of its rubber, elastomers, and resin products, which the company has developed since its founding
Provide notable value-added products across the world that contribute to environmental preservation, energy conservation, and higher functionality
Become a standout global supplier in the belt and functional products fields
The plan is divided into two five-year stages: BF-1 and BF-2. In the BF-1 stage, the company followed five guidelines, which are summarized below.
Evolution of global market strategy
Bando aspired to become the leader in belt products in Asia, which is a region of strategic importance for the company. To this end, it aimed to expand its production capacity at existing production bases (such as in Thailand and Indonesia), while concurrently ramping up production in bases in emerging markets (such as in India and Vietnam). It also worked to broaden its business area in China and the ASEAN markets, and focused on market development in regions alongside the Mekong river.
In Japan, the company aimed to develop high-performance products in line with market needs, strengthen its brand recognition in the value chain provided by its sales network that is rooted in close ties with customers, and expand peripheral businesses with a focus on the aforementioned core products. As an improvement measure to achieve this, Bando strengthened originality in its strategic products, including those under development, and made modular proposals that combined even higher performance for core products with peripheral products to meet the needs of its customers. In core products, the company indicated it would provide stability and reliably to customers by expanding its value chain with design, installation, monitoring, and inspection functions.
Evolve products
The company aimed to promote the development of products with optimal market specifications tailored to the needs of its customers in various global regions, continually launch products notable for their reduced environmental load, high efficiency, compact design, and multifunctionality, and cultivate new markets accordingly.
Evolve manufacturing
To increase customer trust, the company strived to further reduce the rate of defective products across all the production lines of its plants, and achieve high cost-competitiveness. To this end, it worked to reinforce its Bando Production System (BPS) activities, and replaced some of its existing production lines with new ones.
Create new businesses
The company aimed to enhance core technologies that compound, disperse, and combine rubber, elastomers, resin, and other materials to facilitate their applications in targeted strategic markets (such as optoelectronics, energy, and robotics). In addition, it looked to create new products through original technologies formed by fusing these core technologies with new ones and cultivate new businesses that could serve as next-generation drivers.
Evolve quality of management
The company worked to strengthen its business portfolio management centered on strategic investments in growth products and the elimination of loss-making products and businesses. It aimed to step up management oversight at the consolidated level, strengthen the training of staff, and reinforce its financial position (measures to eliminate net interest-bearing debt and deal with forex and interest rate fluctuations).
Numerical targets for the BF-1 stage and outcomes (financial targets based on Japanese GAAP)
During the five years of the BF-1 stage, the company budgeted JPY25.0bn in capital investment and JPY5.0bn in R&D investment for new products, and aimed to achieve the following numerical targets in the final year (FY03/18).
The FY03/18 results were as follows.
The FY03/18 results exceeded the FY03/13 figures, but finished below the BF-1 targets. As reasons for the shortfall, the company cited lower-than-expected sales in China and South Korea, delays in the development and market launches of new products, and an increase in SG&A expenses caused by higher R&D and other expenses related to IT investment and new businesses. Shared Research understands that earnings during the five-year period were affected by major changes in external factors in the China business (both on the production and sales fronts), the stock market turbulence in China in 2015, and trade friction between the US and China after the Trump administration assumed office. However, Bando also made tangible progress in many areas during the period, reducing costs by installing new production lines at its main plants and launching new products in areas that it had previously not explored (such as medical equipment and electronic products).
Based on the outcomes of the BF-1 stage and the outstanding challenges, the company announced a BF-2 stage that spanned the five years from FY03/19 to FY03/23.
Four guidelines of BF-2 stage
The company will pursue the following four guidelines as its basic strategy to achieve its vision for the BF-2 stage.
Guideline 1: New business creation
The company will work to prioritize the allocation of management resources to activities that create new businesses, and reshuffle its existing business portfolio accordingly. To this end, it has defined the following markets, strategic areas, and key products as its primary targets.
Display field: Bando expects demand for various types of display to expand in tandem with growing uptake in vehicles.
Power electronics field: This field encompasses technologies related to power conversion and control. The company will target thermal management technologies (such as heat and temperature management), which are in high demand.
Medical, welfare, and nursing care markets: The company expects societal aging to drive further growth in these markets.
Bando will also aim to expedite the commercialization of promising products that have already enjoyed some success. Specifically, it will work to strengthen market adoption of product lines developed and launched into the market in the BF-1 stage. To that end, the company will strive to step up initiatives aimed at facilitating expanded use of these products among overseas customers; complete quality designs and refine its production and manufacturing technologies; and pursue commercialization of upgraded products underpinned by fresh concepts.
Guideline 2: Core business expansion
The company plans to strengthen its operations in strategic industries in select regions. It aims to improve customer convenience by providing products with high value. In this way, it looks to capture top market shares in its targeted strategic markets. To gain further customer recognition, it will pursue the following three activities.
Market map activities
The company aims to participate in the strategic markets it has identified as a leading company, and stay ahead of its competitors. These activities are most essential in Bando’s view.
Technical map activities
The company will continue to develop products differentiated by their energy-saving properties and reduced environmental load, while enhancing their functions in line with market needs.
Customer convenience improvement activities
The company will increase its brand recognition and expand its value chain by proposing products and services to customers that improve their convenience.
Guideline 3: Enhancement and evolution in manufacturing
The company aims to grow its core businesses on a global scale, and evolve its manufacturing technology and systems to enhance profitability. It looks to keep its consolidated cost of revenue ratio below 70% and views this numerical target as most important in terms of improving its earnings power. Concrete measures it will implement toward this end are: developing innovative manufacturing methods; promoting the use of the Internet of Things (IoT) and artificial intelligence (AI) at its plants; and pursuing reductions in the manufacturing costs via optimization. The company will develop innovative production methods for its core power transmission belts in Japan, and roll these out horizontally at its overseas production bases along with automated production lines. It will strive to reduce work hours through IoT solutions and expand the use of AI robots. It will streamline its products and material lineups, reduce materials costs, and optimize its global distribution.
Guideline 4: Work style innovation for both individuals and the organization
The company will seek to promote autonomous and creative work styles by providing work environments and systems, and by training staff and fostering awareness. It believes these work style reforms are necessary to underpin the successful execution of guidelines 1–3. At the same time, it will work to keep its SG&A ratio below 20%, while also strengthening its management base.
Numerical targets for BF-2 stage (financial targets presented on IFRS basis)
Through the successful implementation of guidelines 1–4, the company aims to achieve the following targets in FY03/23, the final year of the BF-2 stage.
To achieve these targets, it budgets JPY30.0bn in capital investment (compared with JPY23.6bn in the BF-1 stage) and JPY25.0bn in R&D expenses (JPY20.1bn) over the five years of the B-2 stage. It forecasts depreciation of JPY25.0bn (JPY21.2bn). It plans to increase revenue by about JPY29.2bn over the five-year period, breaking down into increases of JPY17.2bn from existing businesses and JPY12.0bn from new businesses.
Changes in revenue composition
In accordance with its plan, the company looks to increase revenue from JPY41.6bn (FY03/18, same below) to roughly JPY44.0bn (FY03/23, same below) in the Automotive Parts segment (implying a drop in revenue share from 45.8% to roughly 36.6%), from JPY31.8bn to about JPY44.0bn in the Industrial Products segment (implying a rise in revenue share from 35.1% to around 36.6%), from JPY15.1bn to roughly JPY23.0bn in the Advanced Elastomer Products segment (implying a rise in revenue share from 16.7% to about 19.2%), and from JPY2.2bn to roughly JPY9.0bn in the Other Business segment (implying a rise in revenue share from 2.5% to 7.5%). In other words, these changes will alter Bando’s existing revenue composition. (Note that the data above in part reflects estimates by Shared Research.)
Progress to date
Since Bando formulated its BF-2 plans, the external environment surrounding its businesses has taken a sharp turn for the worse. It remains unclear how the trade friction between the US and China will evolve under the Biden administration, which came into power in 2021. Bando has been affected by the COVID-19 pandemic, which is a factor the company had no knowledge of when it drew up its plans. The impact of the pandemic intensified from January 2020, eroding revenue in existing businesses in FY03/20 and FY03/21. In Japan, revenue is gradually returning to pre-pandemic levels as a result of progress with vaccinations, but the pandemic has yet to be contained in Southeast Asia, which is one of the company’s earnings drivers. At present, Bando has left its numerical targets for FY03/23 unchanged, but attaining its revenue growth target for existing businesses (increase of JPY17.2bn from FY03/18) has become a challenge.
At the same time, the company has achieved steady progress in new businesses and new products. Such results are starting to appear particularly in the medical and healthcare equipment business, which is a focus area for Bando.
The medical and healthcare equipment business is mainly led by Aimedic MMT Co., Ltd., a wholly owned subsidiary acquired by the company in May 2019. Aimedic MMT excels in selling orthopedic medical devices, an area in which it has built high brand recognition. It is currently working on several development projects that fuse the core rubber, elastomer, and resin technologies of Bando. One of these projects involves expanding sales of the elastic strain sensor C-STRETCH that was commercialized during the BF-1 stage. C-STRETCH is a novel type of sensor developed by the company using elastic, conductive elastomer material. It allows detection of various strains through superior elasticity and flexibility, and is used to measure movements and biometric information. Bando aims to leverage synergies with Aimedic MMT to establish a medical and healthcare equipment business with C-STRETCH as a flagship product.
Meanwhile, the company is also making steady headway in the electronic products business, another pillar of its new businesses. It is starting to see effects from business growth for its optical clear adhesive Free Crystal for automotive applications, and from its precision polishing material TOPX for displays. In addition, Bando is focusing on expanding sales of its high thermal conductive sheet HEATEX.
Medium- to long-term strategy (Automotive Parts segment)
The first guideline of the BF-2 stage of Bando’s medium- to long-term plan is to create new businesses. The company therefore aims to prioritize the allocation of management resources to activities that create new businesses and reshuffle its existing business portfolio. Its focus on new business creation is mainly driven by a sense of urgency surrounding the decline in its mainstay Automotive Parts segment.
The function of automotive power transmission belts, whether used to drive accessories or camshafts, is to transmit the power of an engine to various parts or locations of the vehicle. However, the ongoing electrification of vehicles has given rise to electric vehicles (EVs) that do away with the classical engine and instead derive their power from a battery and motor. As a result, these vehicles no longer require power transmission belts. Even among hybrids, a category of vehicles with a growing market size that is essentially a stepping stone toward EVs, there are some full-hybrid models (vehicles equipped with a hybrid system that allows them to run on motor power alone for limited periods of time) such as the Toyota Prius that no longer use power transmission belts. The resulting decline in power transmission belts for new vehicles will inevitably also depress demand for belts for repairs in the future.
To overcome these challenges, the company is currently pursuing the following strategies.
Capture demand from mild hybrids
Not all automakers are capable of offering full hybrids such as the Toyota Prius. From a cost perspective or parts (particularly, battery) procurement standpoint, Bando expects demand for mild hybrid vehicles to expand during the transition period the industry needs to fully migrate toward EVs. Mild hybrids cannot run on motor power alone, and therefore require power transmission belts like vehicles with internal combustion engines. Shared Research understands that belts for mild hybrids need to deliver superior heat resistance and durability, as a result of which the company can sell them at a premium of 10% or more over existing belt products. Automakers such as Suzuki Motor, Mazda Motor, and Mitsubishi Motors all manufacture mild hybrids, and Shared Research understands these vehicles are likely to gain further traction not only in Japan but across the world. That said, Bando recognizes that mild hybrids can only serve as a transitory source of demand until all-electric vehicles become the standard, so it has no intention of making such vehicles a pillar of its operations.
Capture demand for new applications
The electrification of vehicles has started to drive demand for new types of power transmission belts. For example, such belts are now being considered for use in electric parking brakes, and already starting to be adopted in power steering and doors. These developments reflect a recognition of the properties of power transmission belts, particularly their high transmission efficiency and quiet operation. Bando expects demand for belts for new applications to further expand in the future.
Capture new demand for products other than belts
Among non-belt products, Bando concentrates on automotive functional films, and it is currently working to increase adoption and sales of its optical clear adhesive (OCA) film for automotive displays, and decorative films for interior materials. The company expects new demand for such products to emerge progressively as automakers seek to increase the visibility of the increasingly diverse information displayed on automotive displays and to enhance cabin comfort. In addition, among new demand sources stemming from the transition to EVs, Bando mainly concentrates on heat dissipation sheets. Vehicles in the future are expected to generate more heat due to increased usage of precision parts in tandem with advances in electrification, and this trend is likely to raise demand for thermal management solutions to prevent defects. With this in mind, the company is working to commercialize its high thermal conductive sheet HEATEX, which facilitates efficient thermal management.
Expand existing businesses with focus on repair market
Bando controls a sizeable share of the Japanese market for repair parts, but its global share in this market has lagged its domestic share, so the company sees significant room for future growth in its repair operations overseas. Aside from Japan, it focuses much of its attention on operations in China, the US, and India. Not all countries in the world are actively pursuing the electrification of vehicles, and many regions have also fallen behind with related initiatives. A prime example of this is the US, which is the world’s largest car market (second-largest market for new vehicle sales with roughly 17.5mn units sold per year, and largest market by car ownership, with 285.0mn vehicles owned). Bando has established a global supply structure with four strategic regions, and its bases in the US and Mexico make up one of these (only the base in the US has manufacturing capacity). However, its presence in this region remains small compared with Japan and other Asian nations. Although the company faces competition from powerful local rivals such as Gates Corporation and Dayco Products, Shared Research understands that Bando has considerable room to further leverage its existing bases.
While the general push for the electrification of vehicles, which includes the transition to EVs, has major implications, it is not the case that all vehicles will go all-electric by a certain date. Neither is it plausible that all vehicles currently in circulation (78.5mn in Japan, roughly 1.4bn worldwide) will be declared unusable by a certain date. Shared Research understands that Bando is ahead of competitors such as Mitsuboshi Belting in its efforts to prepare for future changes in the automotive landscape.
Medium- to long-term strategy (Industrial Products segment)
The Industrial Products segment is the second pillar of the company’s operations. Unlike the mainstay Automotive Parts segment, which is being affected by the inexorable rise of electrification in the automotive industry, the Industrial Products segment faces few pressing management challenges. However, Bando recognizes that similar challenges may emerge in the prevailing environment that calls for reductions in power generation from fossil fuels (carbon-neutral society) and in the environmental load. To prepare for such potential changes, the company is pursuing a medium- to long-term strategy in the segment.
Achieving success in belts for large agricultural machinery amid focus on priority industries
In the Industrial Products segment, Bando supplies products to a broad range of customers in diverse industries. However, it views robotics, semiconductor production equipment, machine tools, agricultural machinery, and financial terminals as strategic targets in focus industries. While it is making steady headway in each of these fields, it has always excelled in products for agricultural machinery. Shared Research understands that the profit margins generated on belts for agricultural machinery exceed the segment profit margin (core operating profit margin of 7.4% in FY03/21), and that this is attributable to the company’s high share of supply to Japanese original equipment manufacturers, the high belt quantities needed for agricultural machinery (multiple belts required per piece of machinery), and Bando’s strength in selling own-brand repair products.
Climate change has led to global issues such as food shortages that are apparent in the recent surge in food prices. The company therefore believes that demand for agriculture will expand further going forward. At the same time, farming populations (i.e., the number of workers that engage in agriculture) are shrinking, particularly in developed nations, so the dependence on agricultural machinery is bound to increase. Against this backdrop, research firm Global Information expects the global agricultural machinery market to expand at a CAGR of 4.2% from USD92.2bn in 2020 to USD113.0bn in 2025.
Bando believes the growth in demand for agricultural machinery belts will be driven by large machinery, and it concentrates on expanding belts for large machinery used to cultivate crops, which represent a larger market than their counterparts to cultivate rice. It has already finished preparations for production lines (Phase 1), and started supply to major local manufacturers in overseas growth markets. Bando is also working to expand repair sales for large agricultural machinery. It has announced growing sales of belts for large agricultural machinery in China, both to original equipment manufacturers as well as in the repair market. The company expects demand for large agricultural machinery to grow particularly in the US and China as both countries have large populations and land areas, and it therefore targets these markets under its medium to long-term strategy.
Launch and expand sales of new light-duty conveyor belts that take advantage of materials processing technology
Light-duty conveyor belts are another area the company is focused on. Bando is one of just a handful of large manufacturers of conveyor belts in Japan. However, in the previously thriving market for large conveyor belts, demand from the steel and other industries has plateaued. For this reason, the company has added high-margin sealed conveyor products to its lineup, and it is working to move from a product sales-centric business model to one that expands services. In addition to such measures, Bando is focusing on light-duty conveyor belts, a market poised for expansion. It has launched and is stepping up sales of its “Mr.” series of light-duty conveyor belts (Mr. Spike in 2019 and Mr. Non-Stick in 2020). It is also releasing new belts that take further advantage of its materials processing technology to enhance properties such as grip, durability, and adhesive support.
Shared Research understands that the medium- to long-term strategy for the Industrial Products segment not only entails driving growth for the segment but also offsetting the decline in sales in the Automotive Parts segment, which is currently in a transition phase as cars become increasingly electrified.
Business
Business model overview
Bando is Japan’s largest manufacturer of power transmission and conveyor belts. In FY03/21, it reported revenue of JPY81.4bn and core operating profit of JPY4.9bn. The mainstay Automotive Parts segment posted revenue of JPY35.0bn and core operating profit of JPY2.4bn (accounting for 43.0% and 48.3%, respectively, of total revenue and total core operating profit), the Industrial Products segment revenue of JPY30.2bn and core operating profit of JPY2.2bn (37.1%, 45.3%), the Advanced Elastomer Products segment revenue of JPY11.9bn and a core operating loss of JPY129mn (14.6%, N/A), and the Other Business segment revenue of JPY4.4bn and core operating profit of JPY339mn (5.4%, 6.9%). Shared Research estimates belt-related revenue came to JPY65.0–68.0bn, 20–25% above the JPY54.4bn reported by Mitsuboshi Belting (TSE1: 5192), the second-largest belt supplier in Japan.
Types of power transmission belts and their functions
The power transmission belts manufactured and sold by Bando are made of rubber or urethane, and their function is to transmit power of an engine or motor. They are mainly used in automobiles and industrial machinery.
Bulk of the automotive power transmission belts are accessory drive belts (V-belts and V-ribbed belts)
The lion’s share of the power transmission belts used in automobiles are accessory drive belts (fan belts), which drive automotive accessories* by running over pulleys. Synchronous belts, which rotate camshafts**, are another type of automotive belts.
Accessory drive belts are broadly divided into V-belts and V-ribbed belts. Flat belts are another type of accessory drive belts, but their use within the automotive industry is currently limited to some diesel engine vehicles. V-belts first appeared on the scene in the early 1970s, followed by V-ribbed belts in the late 1980s. Since then, belts have continued to evolve through a diversification of the rib shape designed to grip the pulley. At present, V-belts are predominantly employed in diesel engines and V-ribbed belts in gasoline engines. Another difference in application is that V-belts are used in trucks (commercial vehicles), while V-ribbed belts are used in passenger cars. V-ribbed belts for passenger cars have three or four ribs for light vehicles, six ribs for vehicles with 2-liter engines, seven ribs for vehicles with 3-liter engines, and eight or more ribs for vehicles with 4-liter-plus engines.
Note: Core wires made of polyethylene terephthalate (PET) or aramid fiber are embedded into adhesive rubber layers to increase strength and durability. The V-ribbed belt on the right has three ribs (three contact surfaces at the bottom). The V-belt on the left has one contact surface.
Note: For an illustration of a belt fitted to an engine, refer to the image “Accessory drive belt (V-ribbed belt) inside an engine” in the “Basic business model” section.
Belts have a physical lifespan
The materials used in belts deteriorate over time and therefore have a physical lifespan. V-ribbed belts last longer than V-belts. Modern passenger cars in principle use one accessory drive belt per vehicle.
Automotive synchronous belts at one time were replaced with chains
Synchronous belts are fitted in locations that require resistance to heat, oil, and abrasion, as well as mechanical (tensile) strength, and would therefore struggle to meet the desired quality requirements if they were made of the same materials as V-belts and V-ribbed belts (chloroprene rubber [CR] and ethylene propylene diene monomer [EPDM]). For this reason, they are made of hydrogenated nitrile rubber (HNBR), which ensures a longer lifespan but at a higher cost (about 5x the cost of CR). At one point in the past, synchronous belts were replaced with chains to meet increased heat resistance requirements, and they nearly fell into disuse. Moving into the 2010s, however, automakers revisited this approach amid rising demand for fuel efficiency and thanks to the improved durability and overall performance of synchronous belts, which offer minimal friction loss. As a result, synchronous belts enjoyed a revival, becoming widely used in new fuel-efficient gasoline vehicles with small-displacement engines and diesel vehicles. While Bando manufactures and sells high-strength synchronous belts that drive camshafts, its core products are accessory drive belts (V-belts and V-ribbed belts).
Meanwhile, industrial machinery uses various types of power transmission belts that differ by application, ranging from V-belts to flat belts and toothed belts. It is not uncommon for one piece of industrial machinery to require multiple power transmission belts.
Basic business model
Capture replacement demand for belts (consumables) by providing repair parts
Automotive belts (including for motorcycles), industrial machinery belts, and related peripheral equipment represent Bando’s core operations, accounting for roughly 80% of its revenue. Under its present business model, the company basically manufactures and supplies power transmission belts for new vehicles and industrial machinery, and subsequently captures replacement demand by providing repair parts. Power transmission belts are made of rubber and urethane (two raw materials derived from naphtha), and they are both functional and consumable products. They inevitably deteriorate physically depending on the usage amount and time, and thus generate reliable replacement demand. In addition to wear sustained in the normal course of operation, defects, damage from accidents, and aging are all factors that produce a certain amount of replacement demand.
Establish rapid delivery system by relying on existing network
Timely response to replacement demand, when and where it arises, requires a broad supply network. In Japan, Bando not only supplies products through its own sales network, but also through a nationwide network of specialist trading companies and agents. It has established a supply structure that allows it to rapidly respond to requests, which is the top priority for repair parts needed for replacements. Some of its own-brand products in the Automotive Parts segment and the Industrial Products segment, for which the company has bargaining power, have become established products in their respective industries.
Increase in parts for new vehicles generates subsequent demand for repair parts
In addition, the parts for new vehicles or industrial machinery supplied by Bando subsequently become a major driver of repair part sales. The company takes advantage of its materials processing technology accumulated as a chemicals manufacturer to push bundled system sales that include peripheral parts such as pulleys and tensioners. In Japan, the market for power transmission belts is valued at roughly JPY70.0bn per year. It is a niche market with little prospect for sharp growth. It attracts few new entrants even in the area of product supply for new vehicles. Bando produces and sells power transmission belts while taking advantage of its strengths as the leader in this niche market.
Note: Pulleys are disc-shaped objects around which belts are wrapped.
Core technologies underpinning business model
Processing technologies for materials such as rubber and elastomers are core technologies
Bando’s basic business model is underpinned by five core technologies it has developed and accumulated since its founding in 1906: rubber materials and processing technology, resin materials and processing technology, urethane materials and processing technology, adhesive technology, and nanoparticle creation technology. The fifth technology in this list is the latest addition to the company’s core technologies. It is being cultivated in connection with new businesses under the medium- to long-term management plan. In other words, the first four core technologies play an important role in the company’s existing belt businesses.
The core accessory drive belts (mainly V-belts and V-ribbed belts) supplied by the company must comply with a broad range of requirements specified by its customers (automakers and machinery manufacturers). Their main function is to transmit power, but they must also deliver high transmission efficiency, quiet operation (low noise), durability (reduced susceptibility to damage or scratching), heat resistance, lightweight design to support fuel efficiency, and cost-effectiveness to undercut overseas rivals. These requirements are tightened every time a manufacturer upgrades the performance of its vehicles or machinery.
Proprietary materials processing technology creates barriers to entry
Bando’s technologies to compound, disperse, and combine rubber, elastomers, and other materials are the core technologies that enable it to meet the diverse needs of its customers. The primary raw materials used to make belts are rubber and urethane but these are rarely used as a single material. Bando possesses technologies that compound or disperse these soft raw materials, or combine them with (glue them to) organic or inorganic materials. Key among these are core technologies such as rubber or elastomer compounding technologies, which are integrated in the company’s processing and production technologies. These compounding technologies are original technologies that cannot be easily emulated by new entrants. In this way, they create a significant barrier to entry.
A parts manufacturer with proprietary materials processing technology
Bando is Japan’s largest manufacturer of power transmission and conveyor belts. Its manufacturing activities are supported by production technologies and compounding, dispersion, and combining technologies for rubber, elastomers, and other materials. The latter categories are the reason the company name includes the word “chemical.” Power transmission belt production requires both the production technologies of a parts manufacturer and materials processing technologies. Accordingly, parts or materials manufacturers that merely possess one of these two sets of technologies cannot enter this industry. Bando has sufficient strengths in both categories.
Automotive Parts
Note: The company transitioned to IFRS in FY03/19, so it did not release YoY comparisons with FY03/18.
Note: Segment profit reflects operating profit through FY03/17, and core operating profit from FY03/18.
Note: The company only announces aggregate R&D expenses for the Automotive Parts and Industrial Products segments. Shared Research has broken down and allocated the R&D expenses to each segment in proportion to their revenue.
Overview
The Automotive Parts segment (which also covers motorcycle products) is the core business of the company. In FY03/21, it posted revenue JPY35.0bn (43.0% of the consolidated level), segment profit of JPY2.4bn (48.3%), and a segment profit margin of 6.8%. Operations in Japan accounted for 31.5% of segment revenue and overseas operations for 68.5% (of which Asia made up 56.4% and Europe, the US, and all other regions 12.1%). Overseas revenue is the revenue amount generated by the company’s overseas bases. Shared Research estimates products for motorcycles make up roughly 20% of segment revenue.
The business model for the segment is described in the Basic business model section.